Tag: pleading

Promissory Fraud: Sporting Goods Maker Pleads Seller’s Scheme to Defraud – IL ND

Maurice Sporting Goods, Inc. v. BB Holdings, Inc., 2017 WL 2692124, ponders the reach of the promissory fraud rule (a broken promise normally doesn’t equal fraud), how to plead around it, and the law of the case doctrine.

After a multi-year business relationship for the sale of sporting goods imploded, the plaintiff distributor sued the defendant manufacturer for breach of a 2015 buy-back agreement that required the manufacturer to “buy back” unsold inventory.

The manufacturer counterclaimed; it claimed the distributor defrauded it and tampered with the manufacturer’s relationship with a key customer.  Partially granting the plaintiff’s motion to dismiss the counterclaims, the Northern District discussed the factual specificity required of a plaintiff to circumvent the general rule that promissory fraud isn’t actionable.

The Court first addressed the distributor’s law of the case argument – the manufacturer was trying to relitigate its earlier failed estoppel defense (that the distributor’s fraud barred it from recovering damages from the manufacturer).  The court previously nixed the manufacturer’s estoppel defense because it failed to link the plaintiff’s fraud to the buy-back agreement.

The law of the case doctrine (LOC) prevents a court from reopening issues it previously decided in the same case.  LOC is a flexible doctrine, though.  A court will refuse to apply LOC if there is a change in the law, new evidence or compelling circumstances.

The court declined to apply the LOC doctrine here because the manufacturer’s stricken estoppel defense was premised on fraud by the plaintiff distributor related to a separate transaction – the original distributor agreement – that differed from the buy-back agreement that underlay plaintiff’s suit.

Next, the court examined whether defendant sufficiently alleged an exception to promissory fraud under Federal pleading rules.  Rule 9(b) of the Federal Rules of Civil Procedure requires heightened factual specificity in fraud claims as the Rule tries to discourage litigants from bootstrapping simple breach of contract claims into tort actions with wide-ranging damages.

Promissory fraud is a false representation of intent concerning future conduct where there is no actual intent to do so.  While promissory fraud is generally not actionable, a plaintiff can plead around it by alleging egregious conduct or a pattern of deception or enticements that reasonably induce reliance.  A fraudulent scheme exists where a party alleges a specific and objective pattern of deception including the who, what, where, and when of the misstatements.

Here, the manufacturer was able to point to three different agents of the distributor who made misstatements in three different phone calls in the same month to support the fraud counterclaim.  These allegations that three distributor employees made false promises in order to sabotage defendant’s relationship with a major retailer were definite enough to meet Rule 9’s pleading requirements for fraud.

Afterwords:

While there is some elemental overlap between an estoppel defense and a promissory fraud counterclaim, the defeat of one won’t always cancel out the other where they relate to different transactions and different underlying facts.

To allege actionable fraud based on a broken promise, a plaintiff must plead a scheme to defraud that equates to a measurable pattern of deception or factual misrepresentations.

False Info in Employee Time Records Can Support Common Law Fraud Claim – IL Fed Court

Some key questions the Court grapples with in Laba v. CTA, 2016 WL 147656 (N.D.Ill. 2016) are whether an employee who sleeps on the job or runs personal errands on company time opens himself up to a breach of fiduciary or fraud claim by his employer.  The Court answered “no” (fiduciary duty claim) and “maybe” (fraud claim) in an employment dispute involving the Chicago Transit Authority (CTA).

Some former CTA employees sued the embattled transit agency for invasion of privacy and illegal search and seizure after learning the CTA implanted Global Positioning System (“GPS”) technology on the plaintiffs’ work-issued cell phones. An audit of those phones revealed the plaintiffs’ regularly engaged in personal frolics during work hours.

The CTA removed the case to Federal court and filed various state law counterclaims to recoup money it paid to the ex-employees including claims for breach of fiduciary duty, fraud and conversion. The Northern District granted in part and denied in part the plaintiff’s motion to dismiss the CTA’s counterclaims.

Breach of Fiduciary Duty

Sustaining the CTA’s breach of fiduciary duty claim against the ex-employees’ motion to dismiss, the Court looked to black-letter Illinois law for guidance.  To state a breach of fiduciary duty claim in Illinois, a plaintiff must allege (1) the existence of a fiduciary duty, (2) breach of that duty, and (3) breach of the duty proximately caused damages.  The employer-employee relationship is one the law recognizes as a fiduciary one.

While the extent of an employee’s duty to his employer varies depending on whether the employee is a corporate officer, the law is clear that employees owe duties of loyalty to their employers.  Where an employee engages in self-dealing or misappropriates employer property or funds for the employee’s personal use, it can give rise to a fiduciary suit by the employer.

Here, the Court found that the employees’ conduct, while irresponsible and possibly negligent, didn’t rise to the level of disloyalty under the law.  The Court made it clear that under-par job performance doesn’t equate to conduct that can support a breach of fiduciary duty claim. (**6-7).

Fraudulent Misrepresentation

The Court upheld the CTA’s fraudulent misrepresentation claim – premised on the allegation that the plaintiffs lied to the CTA about the hours they were working in order to induce the CTA to pay them.  Under Illinois law, a fraud plaintiff must show (1) a false statement of material fact, (2) known or believed to be false by the party making the statement, (3) with the intent to induce the statement’s recipient to act, (4) action by the recipient in reliance on the truth of the statement, and (5) damage resulting from that reliance.

Under the Federal pleading rules, a fraud claimant must plead the “who, what, where when and how” of the fraud but the allegation of a defendant’s intent or knowledge can be alleged generally.

Here, the Court found that the CTA sufficiently alleged a fraudulent scheme by the employees to misrepresent the hours they worked in exchange for their paychecks.  This was enough, under Illinois fraud law, to survive the employees’ motion to dismiss.  See FRCP 9(b); (*7).

Take-aways:

1/ While an employee owes an employer fiduciary duties of loyalty, his sub-par job performance doesn’t equate to a breach of fiduciary duty.  There must be self-dealing or intentional conduct by the employee for him to be vulnerable to an employer’s fiduciary duty suit;

2/ An employee misrepresenting hours work can underlie a common law fraud claim if the employer can show it paid in reliance on the truth of the employee’s hour reporting;